Bond yields trend higher despite softer inflation

Subject – Economy

Context – Bond yields trend higher despite softer inflation

Concept –

Benchmark yield closed marginally higher this week despite positive inflation data even as rising crude prices, higher US treasury yields and domestic liquidity factor take precedence.
During the monetary policy, the Reserve Bank of India halted the G-SAP programme while saying it would increase the quantum of VRRR auctions to ₹6 lakh crore by December.
The central bank last week conducted an 8-day Variable Rate Reverse Repo auction in which the cut-off yield came in at 3.9 per cent.
- In comparison, the cut-off for a 7-day VRRR auction had come in at 3.61 per cent in the first week of October.
- The increasing cut-off seems to reflect the central bank’s comfort in paying a higher rate to remove excessive liquidity.
The halting of G-SAP comes at a time when crude prices are gaining an upward momentum.
Bond dealers say if both the crude and the US treasury yields continue to rise, it could have an impact on the domestic yields.
“Rising crude prices and hardening US Treasury yields are the main factors that are driving the G-Sec yields higher. Under these adverse global conditions, the withdrawal of G-SAP has exacerbated the upmove.